Washington Gov. Bob Ferguson recently signed several pieces of legislation enacting significant tax hikes to both the state’s Business and Occupation and the Sales and Use taxes. House Bill 2081, Senate Bill 5814 and Senate Bill 5794 aim to fill a large gap in the state’s budget.
Sales and Use Tax
Effective October 1, 2025, Washington’s retail sales and use tax is expanded to cover a variety of new services, including digital advertising services and certain computer Information Technology (IT) related services. Other services that will now be taxed include the sale of custom software and the customizing of prewritten software, custom website development, data processing and data entry services.
The definition of “sale at retail” in RCW 82.04.050 is amended to include “advertising services.” Advertising services are defined as “all digital and nondigital services related to the creation, preparation, production, or dissemination of advertisements, including … online referrals, search engine marketing, and lead generation optimization, web campaign planning, the acquisition of advertising space in the internet media, and the monitoring and evaluation of website traffic ….”
Excluded from the definition of advertising services are newspapers, print, radio, television and out-of-home advertising such as billboards and other place-based advertising. Thus, the definition is almost exclusively limited to internet advertising. This attempt to tax digital advertising mirrors the attempt made by Maryland in 2021 to enact such a tax. Just like the Maryland digital advertising tax, it appears likely that the Washington digital advertising tax will be litigated on several grounds. As such, the actual enactment of this tax may be delayed.
Business and Occupation Tax
The legislation imposes a new 0.5% tax surcharge on all businesses with Washington taxable income exceeding $250 million. The surcharge is “in addition to all other taxes imposed.” There are a few exemptions from the surcharge, including: any taxable income that is already subject to the financial institution surcharge and income from entities subject to the advanced computing surcharge. The legislation states that this surcharge will be effective from January 1, 2026, through December 31, 2029. Whether this surcharge is temporary remains to be seen.
The New Legislation Also Increases a Number of B&O Tax Rates
- The surcharge for financial institutions increases from 1.2% to 1.5%, effective October 1, 2025.
- The advanced computing surcharge rises from 1.22% to 7.5%, accompanied by a significant increase in the annual cap from $9 million to $75 million, effective January 1, 2026.
- Most standard B&O tax rates for various retail and wholesale activities are being raised from 0.471% and 0.484% to 0.5%, effective January 1, 2027.
- The service and other activities B&O tax rate for businesses and their affiliates with gross income of over $5 million will go from 1.75% percent to 2.1%, effective October 1, 2025. The tax rate remains 1.75% for businesses with a gross income between $1 million and $5 million.
- The B&O tax rate for operating games of chance will go from 1.5% to 1.8%, effective January 1, 2027.
The legislation also eliminates certain B&O tax preferential rates effective January 1, 2026, for certain businesses. For example, the special rates for seafood products manufacturing, dairy products manufacturing, fruit and vegetable canning and processing perishable meat products will all be repealed, thus no longer providing an incentive to those businesses in the state.
Takeaways
The three tax bills resulted in the largest tax increase in Washington State history, and any business with activity in Washington should analyze the impact of these changes carefully. In addition, the enacted digital advertising tax will likely face similar litigation to the Maryland digital advertising tax, and it may take some time before its application in Washington becomes clear. It also remains to be seen if the enacted tax increases solve Washington’s structural deficit or if additional increases will be in store in the future.
Author: Mike Mcloughlin | [email protected]
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